Women Board Seats in Russell 3000 Pass the 20% Mark

Betty Moy Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Women now occupy more than 20% of Russell 3000 board seats, according to a recently released Equilar report. Equilar states that this is the first time Russell 3000 boards have achieved this milestone. In addition, Equilar found that women constituted over 40% of new directors during the first half of 2019, compared to 17.8% of new directors in 2014.

As discussed in a September 11 WSJ article, companies may be responding to a number of factors including existing or anticipated state legislative pressure. California made headlines in 2018 by being the first state to require exchange-listed companies with principal offices within its borders to have at least one female board member or potentially face a monetary fine. While New Jersey is looking to follow California, other states are also considering a variety of initiatives.

Another driving factor is pressure from some of the largest institutional investors, who warned over a year ago that they would start holding boards more accountable. The big-three index fund managers, BlackRock, Vanguard and State Street Global Advisors (State Street), recently released their annual stewardship reports, and some report their voting record against directors on boards that fail to meet certain standards.

State Street published its Stewardship Report 2018-19 earlier this month stating that since March 2017, State Street identified 910 companies in the U.S. market that do not have a female board member. As of 2019, almost half of these companies have added a female director. With regard to the remaining half, State Street voted against at least one director at 421 of these companies from March 2018 through February 2019.

For companies in the United States as well as other selected regional markets, the stewardship report states that “in 2020, [State Street] will vote against the entire nominating committee, not just the chair, in [the investor’s] target markets if [it has] concerns about the lack of gender diversity for four consecutive years and [is] unable to engage in productive dialogue.” (emphasis added)

Curiously, the stewardship report states that the applicable period is four consecutive years, not three, as State Street has stated since September 2018. Moreover, in March 2019 the firm reiterated that it “will vote against the entire slate of board members on the nominating committee if a company does not have at least one woman on its board, and has not engaged in successful dialogue on State Street Global Advisors’ board gender diversity program for three consecutive years.”(emphasis added) Without further information, it is unclear whether State Street is applying the four-year period only to the companies referenced in the stewardship report or whether State Street is modifying the proxy voting guidelines intended for 2020.

BlackRock also released its 2019 Investment Stewardship Annual Report, which states that during the 2019 proxy season, the investor voted against 52 directors at Russell 1000 companies that had fewer than two women on their boards. The report adds that prior to voting against these companies, BlackRock addressed letters in 2018 to selected Russell 1000 companies that had fewer than two female board members. Moreover, BlackRock’s 2019 proxy voting guidelines state that the investor expects U.S. public companies to have at least two female directors, and may vote against nominating committee members when BlackRock believes a company has inadequately accounted for diversity in its board composition. When deciding how to proceed, the stewardship report reads that the firm considers “factors such as the company’s commitment to increase board diversity within the next 12-18 months, the addition of a diverse director within the previous year, board tenure and public statements that focus on diverse recruiting efforts.”

Vanguard’s stewardship perspective on board diversity states that the firm is more explicitly urging boards to seek greater diversity across a wide range of personal characteristics, including gender, and is calling for greater progress. Its Investment Stewardship 2019 Annual Report, however, does not provide an aggregated tally of the number of directors the investor has voted against.

While Russell 3000 boards are improving, 309 (10.8%) remain all male. Unsurprisingly, this proxy season, the nominating committee chairs of companies with all-male boards received fewer votes for reelection. According to Institutional Shareholder Services Inc. (ISS), 36% of nominating committee chairs of companies with all-male boards received less than 80% of votes cast in 2019, compared to 20% of the nomination committee chairs of all-male boards in 2018.

Investor pressure against companies that fail to have female directors will continue into the 2020 proxy season. Companies with only one female director though should continue to consider gender diversity. This proxy season, nominating committee chairs at companies with only one female director experienced a decline in shareholder support, albeit not as severely as at companies with all-male boards. There has been a 4% increase in nominating committee chairs who have received less than 80% of votes cast, from 11% in 2016 to 15% in 2019, according to ISS.

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